Vice President for State Fiscal Policy
As federal policymakers consider another package to address the deep economic downturn, one of the most effective steps would be to provide substantial federal grants to help states address their huge revenue shortfalls, as the House-passed Heroes Act would do. That would help states and localities avoid cuts in services and investments that would worsen racial inequities — as my colleague Nick Johnson recently wrote. It would also help them avoid laying off teachers and other workers and imposing other budget cuts that would make the recession even worse and last longer.
The Heroes Act includes a temporary boost in the share of Medicaid costs that the federal government pays (known as the FMAP) — greater and likely longer-lasting than the boost under the Families First Coronavirus Response Act of March — and $500 billion in additional grants that states can use to cover their massive revenue shortfalls. That, plus earlier federal aid and state rainy day funds, could cover most of states’ shortfalls, which we’re now estimating could be about $615 billion through 2022, based on the latest economic projections from the nonpartisan Congressional Budget Office (CBO) and the Federal Reserve. The proposal also includes $375 billion in local fiscal relief, $90 billion in emergency education funding, $20 billion for tribal nations, and $20 billion for territories.
Such aid for states would protect jobs and the economy, as economists across the political spectrum have pointed out:
States’ and localities’ costs are rising rapidly as they fight the pandemic and jobless workers turn to public assistance to meet their families’ basic needs. At the same time, state revenues have fallen off the table. Sales and income tax collections — which account for most state tax revenues — are plummeting with so many businesses closed and unprecedented layoffs, and other state revenues such as gas tax collections are also way down.
Because states must balance their budgets each year, these huge revenue shortfalls mean that states must lay off workers and cut spending in other ways, raise new revenue, or some combination of the two. State and local policymakers have already laid off or furloughed a million and a half workers and are calling for other spending cuts. Without substantial fiscal aid, these furloughs and layoffs may become permanent and these cuts will come to fruition.